Principles of Corporate Finance
Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 12, Problem 1PS

Terminology* Define the following:

  1. a. Agency costs in capital investment.
  2. b. Private benefits.
  3. c. Empire building.
  4. d. Entrenching investment.
  5. e. Delegated monitoring.

a)

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Summary Introduction

To define: Agency cost in capital investments.

Explanation of Solution

Agency costs in capital investments are nothing but value lost when the managers of the company don’t act to maximize price. This includes monitoring and control cost.

b)

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Summary Introduction

To define: Private benefits.

Explanation of Solution

Private benefits are nothing but the advantages or perks enjoyed by the managers

c)

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Summary Introduction

To define: Empire building.

Explanation of Solution

Empire building is that the act of making an attempt to extend the scope and scale of an individual or organization powers and influence. Within the corporate world, this can be seen at the intra-company level once managers are involved in increasing their size but the NPV.

d)

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Summary Introduction

To define: Entrenching investment.

Explanation of Solution

Managerial entrenchment happens once mangers gains a lot of power, with that they are able to use firm to more their own interests instead of the interests of the shareholders. They choose the projects to increase their value to the firm.

e)

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Summary Introduction

To define: Delegated monitoring.

Explanation of Solution

Delegated monitoring is nothing but monitoring on behalf of others or principals.

Example, the board of directors of a company monitors company management and operations performance on behalf of the company stakeholders.

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